Question

7. Given the following production possibilities for the two countries, identify the comparative advantage and absolute advantage for clocks and cars by each country. Who buys cars and who sells the cars? Show your work.

8. One trade-off society faces is between efficiency and equity. Define each term. If the U.S. government redistributes income from the rich to the poor, explain how this action affects equity as well as efficiency in the economy.

Answer 1

Solution 7

Comparative advantage occurs when party has ability to produce product at lower opportunity cost than competitors.

Absolute advantage occurs when party has ability to produce greater quantity of product than competitors using same resources .

Lets assune two countries Italy and Japan and their production units as below.

Italy: Cars 600. Clocks 2000

Japan: Cars 800 Clocks 1000

From above data it is visible that Japan has absolute advantage in producing both cars and clocks whereas it has comparative advantage in clocks because it is better at producing them. Hence Japan will sell cars and Italy will buy them.

Solution 8

Efficiency in society is phenomena by which it derives most from allocation of scarce resources . Equality is phenomena of distribution of economic prosperity evenly between members of society . However when incone distributed frim rich to poor, the willingness and motivation to work is lesser. Hence fewer goods are produced and economic pie shrinks. Now if government cuts this economic pie it gets even smaller for distribution And hence equity cannot br achieved with substantial effects.

Hence equity and efficiency both are affected when incoje distribution takes place.